How Do Investments in Intellectual Capital Create Profits?

The objective of this paper is to determine how investments in intellectual capital (IC) are transformed through various stages into profits. First, a theoretical framework containing different aspects of IC (investments in IC, value of IC and efficiency of IC) and productivity and profitability, as well as their relationships is constructed based on a literature review. Second, relationships between measures of different components are examined using correlation analysis. The data used in the empirical analysis comprises of information from financial statements of Finnish companies during the time between 2001 and 2003. It includes overall 60,304 cases which represent eleven largest industries in Finland. The study provides empirical evidence to support assumptions concerning the relationships between factors related to IC and productivity and profitability. Against expectations, the results showed no linear relationship between the investments in IC and profitability. However investments in IC seem to improve the value of IC, which seems to lead to higher productivity.